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Abstract
While it is generally accepted that change in the real value of the dollar is an important determinant
of exports, it has not been rigorously demonstrated that this relationship, derivable
from theory, holds empirically for agricultural exports and the components of agricultural
exports. Starting with a dynamic maximizing framework, this paper estimates the real trade-weighted
exchange rate and trade partner income effects on U.S. agricultural exports. For the
period 1970–2006, a one percent annual increase in trade partners’ income is found to increase
total agricultural exports by about 0.75 percent, while a one percent appreciation of the dollar
relative to trade partner trade-weighted currencies decreases total agricultural exports by about
0.5 percent. While these effects carry over to 12 commodity subcategories, they are conditioned
by differences between bulk and high value commodities, and differences in the export
demand from high compared to low income countries. We use a directed acyclic graphs (DAG)
technique to identify the inverted fork causal relationships from vector autoregression (VAR)
models. We also find that there is an asymmetric exchange rate effect so that the negative
effect of exchange rate appreciation on exports sometimes dominates the positive effect of
foreign income growth.